UK retail sales fall unexpectedly in January

Shoppers browse the aisles in the Canary Wharf store of Waitrose in London January 23, 2013.

Reuters/Neil Hall

LONDON (Reuters) - British retail sales unexpectedly fell in January hurt by heavy snow, reviving worries that the economy may be slipping into a third recession since the onset of the financial crisis.

Sales volumes slipped 0.6 percent in both monthly and annual terms, the Office for National Statistics said on Friday, confounding economists' expectations for growth.

"The underlying picture is that the economy is bouncing along the bottom, so weather disruptions can easily tip it into negative territory," said Rob Wood, economist at Berenberg Bank.

Britain's economy has endured two recessions since the 2008 financial crisis and contracted again at the end of last year, coming closer to its third slump, although stronger recent economic data has raised hopes of modest growth in early 2013.

"This release brings a dip back on the table," Wood said.

Another recession would pile pressure on Britain's Conservative-led government, which has had to defend its austerity programme against criticism it is stifling growth.

The government says cuts are necessary to shrink a swollen deficit, but it also needs solid growth to meet its budget targets and bolster its chances of winning a 2015 election.

The pound hit a half-year low against the dollar and British government bonds extended gains after the retail data release.

The ONS said weak food sales, which posted their biggest monthly fall since May 2011, were the main reason behind the overall sales drop, with bad weather forcing some small grocers to close.

"Given it has come early in the quarter, there is some chance of catch-up in February and March," said David Tinsley, economist at BNP Paribas.

"But of course forgone food sales are not necessarily made good," he said, adding that a scandal over horse meat sold as beef might also hurt sales.

Unemployment figures next week will provide further clues about the state of the economy at the turn of the year.

One major British retailer has showed shoppers might be getting back to spending in February. John Lewis said on Friday that sales at its department stores jumped by more than a fifth last week compared to a year earlier. However, that number was flattered by heavy snowfall in February 2012.

The ONS said the quantity of food sold fell by 2.6 percent compared with January last year, touching its lowest volume since April 2004.

Meanwhile, the share of online food sales jumped by nearly a third, probably another reflection of the bad weather that kept shoppers at home. The increase in online shopping helped big retailers, the ONS said.

Retail sales excluding fuel fell 0.5 percent on the month but were 0.2 percent higher than in January 2012 - much weaker than economists' forecasts for rises of 0.4 percent on the month and 1.4 percent on the year.